Australian dollar holds up as virus panic begins

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DXY lost a bit of gournd last night as EUR continued its hopeful bounce:

The Australian dollar held on versus USD but was caned elsewhere:

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Gold spiked:

Oil dumped but not enough:

Metals have a better idea:

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Miners were pile-driven:

Plus EM stocks:

Junk fell but is still sanguine:

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All bonds soared:

As stocks gace back most of 2020 gains:

Westpac has the wrap:

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Event Wrap

The Chicago Fed activity index for January slightly disappointed at -0.25 (vs -0.15 expected). The Dallas Fed survey index at +1.2 beat estimates at 0.0.

Germany’s IFO business climate survey rose slightly, from 96.0 to 96.1, beating estimates of a slight decline. The expectations component rose to 93.4 (vs 92.9 expected).

Event Outlook

In the US, the market anticipates that modest gains in house prices will continue in December, the S&P/CS 20-city home price index rising 0.4%. Conference Board Consumer Confidence is also expected to remain robust, holding at an above-average level in February.

The Federal Reserve’s Clarida will speak on the economy (7:15 AEDT).

The virus panic has started but only just. There is no distress yet in junk debt anywhere. That’s the market where we expect to see the virus financial contagion to hit the hardest. It will determine whether a health crisis turns financial crisis.

First we will need to see greater economic pressure and some sizeable bankrupties. That will come from the demand side. Phones as one example:

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And the supply side, via Goldman:

The final point is about black swans & brittle systems: The growing stress in our very complex globalised economy means it is much less resilient, see the discussion in section 3.1 and figure 2. Thus a small shock or an unpredictable event could set in train a chain of events that could push the globalised economy over a tipping point, and into a process of negative feedback and collapse.

…We are locked into an unimaginably complex predicament and a system of dependency whose future seems at growing risk. To avoid catastrophe we must prepare for failure. Our immediate concern is crisis and shock planning. It should now be clear that this is far more extensive than merely focussing on the financial system. It includes how we might move forward if a reversion to current conditions proves impossible. That is we also need transition planning and preparation. Even while subject to lock-in and the reflexivity trap, this will be most effective if it works from bottom-up as well as top-down. Finally, neither wealth nor geography is a protection. Our evolved co-dependencies mean that we are all in this together.

… however, risks are clearly skewed to the downside, with an increasing amount of companies suggesting potential production cuts should supply chain disruptions persist into Q2 or later. The supply chain effect is likely nonlinear with the length of the outbreak, as production is likely to remain largely unaffected until inventories run out, after which production may fall sharply.

Both can trigger sudden, large scale insolvencies and a debt shakeout. The major imbalance of this cycle has been low grade corporate debt issuance worldwide – espacially in the US to buy stocks – when that adjusts the whole box and dice is going to unravel.

And the Australian dollar crash.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.